Australian Government Walks Fine Budget Line With RBA Primed to Hike

SYDNEY—Australian Treasurer Jim Chalmers will deliver the government’s 2024-2025 federal budget next Tuesday amid concerns that strong revenue growth will tempt him toward a jump in spending, stoking the case for higher interest rates.

Economists expect Chalmers to announce a budget surplus for 2023-2024, supported in part by high commodity prices and strength in the job market, with unemployment continuing to hover near its lowest level in half a century.

The question on the lips of the governor of the Reserve Bank of Australia, Michele Bullock , will be how much of that revenue will flow back into the economy by things like added measures aimed at easing a cost-of-living surge for consumers.

Bullock told reporters Tuesday that the RBA’s board had considered a further rise in interest rates, sending a shot across the bow of the center-left Labor government ahead of the budget.

The budget is being framed ahead of a federal election expected to be held in early 2025.

The public acknowledgment of the RBA board’s discussion of what would be a 14th interest-rate rise in two years signaled that the central bank has grown more concerned about the inflation outlook after first-quarter data came in above its own expectations.

Economists have warned that the RBA isn’t even close to a decision to cut interest rates, and the more likely outcome at the moment is that the central bank will need to tighten the policy screws further before the end of this year.

“The challenge fiscal policymakers face is that although they are flush with revenue, a cautious approach ought to be taken to additional spending because the economy is still operating at full employment, and inflation is still too high,” said Paul Bloxham, chief economist at HSBC Australia.

“Loosening fiscal policy settings at this point could mean that monetary policy would need to be tightened further yet—or that rates need to be higher for longer,” he added.

The RBA is conscious of the fact that significant income tax cuts will be delivered midyear and that they target low- and middle-income earners, who are more likely to spend added income than save it.

The government has already signalled its plans to spend in the area of subsidies for local manufacturing, including for the production of solar panels.

In addition, the budget will focus on business tax incentives, increased defence spending, funding for domestic violence support, changes to student debt policy and infrastructure.

Chalmers has played down the risk over the budget stoking the flames of inflation.

“It will be a responsible budget, a restrained budget, and it will maintain our focus on that inflation fight,” he said Thursday in a radio interview.

“There will be help for people with the cost of living, but we’ll make sure that that cost-of-living help is part of the solution and not part of the problem when it comes to inflation,” he added.

A risk that the RBA will also be alert to is the probability that the government will hold back some of its revenue gains to support added spending closer to the election.

Josh Williamson , chief economist at Citi Australia, said Chalmers will likely push new spending into the future to avoid overheating the economy now.

“The government does not want to be seen promoting policies that add to the risk of further policy tightening,” he said.

This suggests that new spending will be pushed into the government’s forward budgetary projections, while measures that directly reduce inflation could be announced virtually immediately, Williamson added.

A sharp technology sell-off has exposed a new anxiety on global markets: whether the enormous borrowing behind the artificial-intelligence infrastructure boom can generate sufficient returns as interest rates rise and Chinese competition intensifies.

The artificial-intelligence investment boom has powered technology shares, semiconductor manufacturers and data-centre operators to extraordinary heights. Last week, investors were given a reminder that much of this expansion is being built with borrowed money.

The technology-heavy Nasdaq Composite fell 4.5 per cent over the week ended October 16, its weakest performance since late June. Semiconductor shares suffered an even deeper correction, with the Philadelphia Semiconductor Index losing about 11.4 per cent.

The selling spread quickly through global markets. Micron Technology fell 14.6 per cent over the week, while South Korea’s Samsung Electronics and SK Hynix dropped approximately 18 per cent and 24 per cent respectively.

This was more than a routine bout of profit-taking. Investors were reassessing three interconnected risks: higher interest rates, the rapidly expanding debt burden attached to AI infrastructure and the prospect of stronger competition from Chinese memory-chip manufacturers.

The debt behind the AI build-out

Artificial intelligence requires a physical infrastructure network of enormous scale. Data centres must be built, advanced processors purchased, power supplies secured and cooling systems installed before customers begin generating meaningful revenue from them.

Technology companies are increasingly supplementing their own cash with corporate bonds, syndicated loans, equipment leases, private credit and project-level financing.

JPMorgan describes the emerging funding model as a combination of conventional corporate borrowing and project finance tied to individual data-centre assets. In Australia, the Reserve Bank estimates that syndicated loans accounted for approximately three-quarters of data-centre financing during 2025 and 2026 to date.

The numbers are becoming large enough to affect broader credit markets. The Federal Reserve Bank of Dallas has cited Wall Street estimates suggesting AI-related investment-grade bond issuance could approach US$300 billion in 2026 alone.

That borrowing is not automatically problematic. Debt can be an efficient way to finance long-lived infrastructure when future revenue is sufficiently predictable. The concern is that AI technology, customer demand and computing economics are changing much faster than the repayment schedules attached to the assets.

A data centre financed today may carry debt for years. Investors must therefore make assumptions about future utilisation rates, electricity prices, chip performance, customer concentration and the amount businesses will ultimately pay for AI computing.

When interest rates rise, those assumptions become less forgiving.

Inflation changes the calculation

September’s US inflation data intensified the pressure. Consumer prices increased 3.7 per cent over the year, ahead of market expectations and up from 3.4 per cent in August.

The hotter reading reduced confidence that interest rates would fall quickly and pushed bond yields higher. That matters particularly for companies whose valuations depend on profits expected well into the future, as well as highly leveraged infrastructure operators that may need to refinance.

CoreWeave has emerged as a closely watched test case. The specialist cloud-computing company has accumulated substantial debt and lease obligations to build AI capacity, while relying on a concentrated group of large technology customers.

Its shares fell sharply during the sell-off, while the cost of insuring its debt against default climbed. CoreWeave has argued that its contracted backlog more than covers its obligations and that financial markets do not always understand its business model. Nevertheless, its securities have become a proxy for investor confidence in debt-funded AI infrastructure.

Oracle, another major investor in AI computing capacity, fell 8.8 per cent in Friday trading, while CoreWeave dropped 15.5 per cent.

The question is shifting from how much AI infrastructure can be built to how profitably it can be operated.

China adds another source of pressure

Interest rates were not the only catalyst. Reports of advances by Chinese memory-chip producer ChangXin Memory Technologies raised concerns that lower-cost Chinese products could increase competition across the global semiconductor industry.

Memory chips are essential to AI systems, but the industry is historically cyclical. Periods of tight supply and high pricing can encourage rapid investment, eventually producing oversupply and falling margins.

The prospect of a well-funded Chinese competitor expanding its technological capabilities unsettled investors in Samsung, SK Hynix and Micron. It also demonstrated that AI-related demand does not insulate chipmakers from conventional competitive pressures.

That combination—slower rate cuts, more expensive financing and potentially cheaper supply—challenged the assumption that every company exposed to AI would enjoy continually expanding margins.

A reset rather than the end of the boom

The sell-off does not establish that the AI boom is ending. Demand for computing power remains strong, the largest technology companies continue to generate formidable cash flows and many infrastructure projects are backed by long-term customer contracts.

What has changed is the market’s willingness to overlook the price and financing structure of that growth.

The most resilient companies are likely to be those able to fund investment from operating cash flow, secure long-duration customers and demonstrate that new capacity will earn returns comfortably above its financing costs.

More speculative operators may face greater scrutiny, particularly where debt is expensive, customers are concentrated or expected revenue depends on demand that has not yet materialised.

For Australian investors, the lesson extends beyond US technology shares. Local data-centre operators, infrastructure funds, electricity suppliers and property groups are increasingly exposed to the same investment cycle.

Artificial intelligence may remain one of the defining growth themes of the decade. But last week’s correction showed that enthusiasm for the technology does not eliminate financial discipline.

The next stage of the AI boom will be judged not only by computing power, model performance or demand for chips, but by something more traditional: whether the assets being financed can generate enough cash to repay the money borrowed to build them.

Fact box

Nasdaq Composite: Down 4.5 per cent for the week ended October 16, 2026

Philadelphia Semiconductor Index: Down approximately 11.4 per cent

Micron Technology: Down approximately 14.6 per cent

Samsung Electronics: Down approximately 18 per cent

SK Hynix: Down approximately 24 per cent

US September inflation: 3.7 per cent annually

Estimated 2026 AI-related investment-grade issuance: Approximately US$300 billion